From Covert to Overt External Financing Michael Carnahan 15 September 2004

Afghan Context Afghan Context How was expenditure financed How was expenditure financed Covert Financing Covert Financing Deficit Financing Deficit Financing Questionable Mandate Questionable Mandate Divided Cabinet Divided Cabinet De jure centralised De jure centralised De facto federal/decentralised De facto federal/decentralised

Rest of talk Revenue Revenue Operating budget Operating budget SY 1381 (02/03) SY 1381 (02/03) SY 1382 (03/04) SY 1382 (03/04) Development Budget Development Budget Evolution over time Evolution over time

Revenue 1 - Tribute From tribute to taxation From tribute to taxation Herat Herat Northern Afghanistan Northern Afghanistan Setting the domestic revenue target Setting the domestic revenue target How much is already being collected How much is already being collected

Revenue 2 – customs reforms Previous system Previous system Developing reform proposals Developing reform proposals Organised opposition Organised opposition Finding a compromise Finding a compromise Implementing the compromise solution Implementing the compromise solution The role of TA in customs reform The role of TA in customs reform

Operating Budget – SY 1381 What level of precision can be expected What level of precision can be expected Technically? Technically? Politically? Politically? Different audiences Different audiences Domestic Domestic International International What will get funded vs what builds capacity What will get funded vs what builds capacity

Operating Budget – SY 1382 Actual decision-making process Actual decision-making process Budget as a tool of policy Budget as a tool of policy Forcing prioritisation Forcing prioritisation Budget as a teaching device Budget as a teaching device Benefits in future years Benefits in future years Operating Budget is Ministers’ priority Operating Budget is Ministers’ priority

Choose staff numbers and pay average – total less than 20 SoldiersPoliceTeachers $ $ $

Operating Budget execution Initial salary payments Initial salary payments The legacy of early actions The legacy of early actions FMIS FMIS The importance of context The importance of context Slow start to 1382 execution Slow start to 1382 execution

Development expenditure Someone else’s shopping list Someone else’s shopping list The wedding registry The wedding registry The sector/program approach The sector/program approach MTEF/Budget support MTEF/Budget support

1. Someone else’s list Just try to find out what is actually happening Just try to find out what is actually happening Supply/donor/agency driven Supply/donor/agency driven Hostility towards anything else Hostility towards anything else No prioritisation No prioritisation Government played off against itself Government played off against itself Necessary evil Necessary evil Not a budget, but need to pretend Not a budget, but need to pretend

2. The wedding registry Predominantly demand driven Predominantly demand driven Single funding/appeal document Single funding/appeal document Attempts to corral donors Attempts to corral donors Funders provided with a prioritised list and asked to choose off the list Funders provided with a prioritised list and asked to choose off the list Discipline only maintained through moral authority Discipline only maintained through moral authority Development partners and line ministries collude to subvert discipline Development partners and line ministries collude to subvert discipline

3 & 4 Next steps (theoretical) Sector wide approach Sector wide approach Projects on the wedding registry put in a coherent context Projects on the wedding registry put in a coherent context Donors asked to put cash in for the dining setting, not just buy some plates Donors asked to put cash in for the dining setting, not just buy some plates MTEF/Budget support MTEF/Budget support All the sectors are individually at stage three All the sectors are individually at stage three Operating budget support is included Operating budget support is included

Next steps (actual) Ongoing problems with: Ongoing problems with: Government (line Ministry) ownership Government (line Ministry) ownership Donor misbehaviour Donor misbehaviour Solution Solution “Core budget” (funds controlled by government) “Core budget” (funds controlled by government) “External budget” (funds spent outside government accounts “External budget” (funds spent outside government accounts Goal – replace “external” with “core” Goal – replace “external” with “core”

Perennial Problems Planned/Committed/Disbursed Planned/Committed/Disbursed Disbursed by who Disbursed by who Lack of a pipeline of projects Lack of a pipeline of projects Development expenditure will be close to zero in the first 18 months Development expenditure will be close to zero in the first 18 months Recognising this may guarantee that it isn’t zero in the next 18 months! Recognising this may guarantee that it isn’t zero in the next 18 months!

Conclusions Lots of progress – lots more still to be done Lots of progress – lots more still to be done Public finance has driven reforms Public finance has driven reforms And will continue to do so once Parliament sits And will continue to do so once Parliament sits Focus needs to be on implementation for both revenue and expenditure Focus needs to be on implementation for both revenue and expenditure